Aalberts NV

AEX:AALB

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the Aalberts Full Year Results 2022 Webcast. All participants in the call are in listen-only mode. Questions can be asked after the presentation.

Now, I would like to hand you over to your host Mr. Wim Pelsma, the CEO of Aalberts N.V. to begin today's presentation. Please go ahead, sir.

[Wim Pelsma, Chief Executive Officer]

Yes. Good morning. Welcome, ladies and gentlemen, joining our webcast of today. The agenda for today is that we go through Aalberts and also the operational development. And then, of course, the financial development of the year.

We will also discuss the outlook, how we look forward towards '23. And hopefully, we have a lot of questions which we can answer. So coming to Aalberts. Yes, you will find Aalberts where technology matters and real progress can be made. And I think also in 2022, you can see that focusing on the right markets, innovation, continuously improving the portfolio brings us to a higher performance of the total company. The brand, Aalberts, where does it stand for? It stands for that we engineer mission-critical technologies, enabling a clean, smart and responsible future.

And also in 2022, the second part, again, proved to be very true that for us, good is never good enough. That we are a company who is -- who goes beyond the line of duty. It needs a tremendous effort every time to overcome all the challenges we also had in 2022.I talk about supply chain issues, I talk about labor shortages, but also the inflation we had to tackle actually from the summer onwards very aggressively to make these results. And then one of the biggest synergies we have in the group, where you would like to use that word is that we exchanged a tremendous amount of knowledge. So, we create greatness through sharing that knowledge on many parts in the business from best practices to technology innovations. And that makes that we are one company [Technical Difficulty] relentlessly pursuit of our excellence every day.

That's the essence of Aalberts. Our way of value creation, as we also did last year, we focus on our Aalberts playing field where we pursue, you could say, four end markets with our mission-critical technologies where we focus more and more on these markets and also with our technologies and get more and more better market position. Our culture, our way of working, our playbook, our management, we sometimes call it our way of working our handbook that good is never good enough is continuously improving our results and continuously improving the margin, generating cash, cash investing in new activities, focusing these activities, and that leads to compounding returns.

All guided by our culture, the Aalberts way, winning with people where we share a lot of knowledge. And this brings us to -- yes, the -- also, again, in 2022, the record results we made, and we are relentless in that pursuit of excellence every day. That's how we create these results. Our playing field, of course, I think a lot of people know that, of course, we engineer mission-critical technologies, enabling a clean, smart and responsible future. I will come back to that also in our sustainable entrepreneurship progress, and we have -- we focus on four end markets. So we are shaping eco-friendly buildings.

We are increasing semicon efficiency. We are driving sustainable transportation and enhancing our industrial niches. And within these markets, you will find Aalberts where technology really matters, where we can make progress through innovations, through our customer contacts, through our uniqueness in technology, but also in our uniqueness in our manufacturing. And that combination -- yes, that's our playing field. So we brought a lot of focus to the business, and we will do that also in the future. The Aalberts playbook, good is never good enough. For us, it does mean that we want to win with the best teams.

That's a continuous challenge to improve our teams to also, yes, bring the talent to other positions in the companies. Our operational excellence and leverage what we pursue every day, we have to keep on doing that to improve our margin, but also to improve our position in our manufacturing from a service point of view towards our customers. It's a continuous improvement, which we pursue, and that leads to a strong cash conversion, where -- which we want to reinvest on a very disciplined way. And also last year, we invested -- in 2022, we invested €200 million in equipment to -- yes, actually, to facilitate the growth for the future, but also to drive our innovations. And looking to the portfolio every day, can we improve that? Where do we make our margin?

What is the margin we can pursue in the future situation? And yes, we have the mentality that when the margin is not able -- that we can't improve that or we can grow the business, that we should step out of that business. And that's a continuous actually situation which you have to pursue.

Now winning with the best teams, coming back to that, and is that we're also very proud that we developed last year 550 talents inside the group, while 21% was promoted to other positions in the group. So also through the segments and through the technology classes, we moved a lot of people. This gives a lot of energy in the Company with all the same culture. And yes, you need that, you need new ideas, you need to move people to other positions because that's creating ideas.

And that's driving also the innovations, because a lot of the growth we generated also last year, and I said it many times, is coming through the -- driving our innovations. The innovation roadmaps, which we started seven, eight years ago, are really paying off. And that's a big part of the organic growth we generated. Now we -- yes, you can also see the picture on this page, the relentless pursuit of excellence, the focus and that gives the compounding returns, driven by entrepreneurship and the relentless pursuit of excellence. So this is culture, this is our playbook every day. The Aalberts way, I already described it. Greatness is made of shared knowledge.

That's what we do. And yes, the first -- let's say, the first ball, we call it, but the first item is, be an entrepreneur, take ownership, go for excellence, share and learn, and of course, act with integrity, very important. The Aalberts way, winning with people. That's how we drive our culture. That's how we win in our positions every day. It's, in my opinion, the biggest success we also created that the whole company is more and more behind this culture and that we also drive therefore the brand of Aalberts every day, combined with this great culture where greatness is made of shared knowledge, and we do it all together. Now the strategy and objectives we presented in December 2021, and of course not changed, because we are busy to execute this strategy.

It was the first year 2022. And yes, the strategy is that we accelerate [Technical Difficulty] that we have created with high entry barriers, pricing power. And again, I think in 2022, we proved that we have pricing power, because the inflation was very high and is still high, but we were able to keep our margin -- our added-value margin on a high level of 62.4%.And the second point is, we have to create sustainable profitable growth with high added-value margins, EBIT margins, innovation rates, and also there, we saw a good progress in 2022. But we are not there compared to the goal we have eventually. And as I already mentioned, driving operational excellence and portfolio optimization is very important to continuously improve and also achieving world-class operations where we still have a lot to do to come there.

Allocating capital in a disciplined way, very important, where do you allocate the capital, because the decision you make will have effect after one or two years [Technical Difficulty] the growth or the improvement of your profit. Sustainable entrepreneurship, we added to our strategy and objectives with clear impact and commitment. We see, and I will have a slide more later that we really made progress there. We went to -- roughly 68% of our revenue is now linked related to sustainable entrepreneurship with the sustainable development goals and the sub goals we have defined. And yes, that's really going in the right direction. So that means that for us, sustainable and sustainability and sustainable entrepreneurship is really integrated in our strategy. And that's really the case.

So we drive the business also in that direction. To do that, we need a very open pragmatic culture, lean structure and using the Aalberts' strength and the Aalberts' brand and the Aalberts' culture to bring that all together, because therefore, this -- the essence of Aalberts is also so important that people are behind that and that we -- that our open and pragmatic culture, that's how we started the Company, but we also keep that. And because that's also how you create the results and utilizing these strengths. Now the objectives we defined in December is that, organically, revenue growth annually of 4% to 6%; EBITA margin, our goal is 16% to 18%; ROCE, 18% to 20%;innovation rate more than 20%, we are now at 17%; SDG rate, more than 70%, we are now at 68%; and our leverage ratio below 2.5.And also the EBITA margin, we are now at 15.5%, and our goal is, of course, to bring it to between 16% and 18%. Organic growth, we showed 8.7% in 2022. So we are above the 4% to 6%.And yes, and the ROCE, of course, because we invested in additional inventory and also, we increased our CapEx, so we are below our target. But in 2023, we will lower our inventory again because the supply chain issues are more and more resolved, what we see.

So we also can generate more cash in 2023. So also that KPI will then will become better towards our goals. But still, our aim is to go to 2026 or earlier to reach these targets. So we still have a few years to go. Operational development, a very important slide. The Aalberts highlights.

Yes. And first time we hit more than €3 billion revenue. So that's -- but you know, it's -- for us, it's not about revenue. For us, it's about results. So we are proud that we can show €500 million, EBITA performance is 10% more than last year, and we had many challenges to overcome. Our added-value margin, very important.

We hit 62.4%. So we were even able to increase it a little bit compared to '21 with 0.2%. And our EBITA margin ended on 15.5%, also an increase of 0.3%. But I think €0.5 billion EBITA. That sounds nice. So net profit, we realized €372 million, also 10% up; and the earnings per share, €3.37, and that was 10% more than the €3.05 we had in 2021.

So also our dividend, we want to propose to the General Meeting, €1.11.Capital expenditure, as already guided, also during our Capital Markets Day, will go up because we have so many business development plans at the moment to drive growth organically. So we ended up with an increase of 38% to more than €200 million. Our expectation is that, that will go further up this year. We have a strong balance sheet, so we will continue investing. We see also that we make the difference there compared to many competitors, who like us, needed also more working capital to drive their business, but we are able to having more working capital, but also to keep on investing. And that, I think, will make a difference in the coming years.

We see that already. So ROCE, as explained, is down because we invested in more capital expenditure, but especially -- and my colleague, Arno will explain it also in additional inventory, because of the supply chain issues and we decided that actually already in September 2021.And when I look back, it was a very good decision because we were able to grow our business, keep our market position, strengthen our market positions organically. And that in the end, ended also in a 9% organic revenue growth in 2022 on top of the already double-digit organic growth we realized in '21.

And do not forget, we also did three acquisitions in 2022 and two divestments that also we spend money on to strengthen our position, especially in hydronic flow control and advanced mechatronics. Yes, very important to mention also is our free cash flow. Yes, due to the fact that we invested in additional inventory, and therefore, more working capital. And we invested in more CapEx, free cash flow was down compared to '21, but we guided that already in the last year. And we expect this year that we will see a reduction of our inventory, especially also in our days DIO, because that's the most important. Yes, and that we will again generate more cash -- free cash flow in 2023.

So it was -- yes, it was a decision we made ourselves to -- as a management, to go this route. But we have now to reduce our inventories when the supply chain is also improving. Now innovation rate, our new KPI, we realized 17%. So that was 15% in 2021. But you should also know that we started once by measuring this when it was below 10%. Our innovation expenditure is more than 5% of our revenue.

And the SDG rate, our goal is more than 70%. That there we hit 68%. So that means that 68% of our total revenue of Aalberts is linked related to the sustainable development goals as we have defined it. Yes. And then the line we also put on our press release that we realized 9% organic growth -- revenue growth and an EBITA margin of 15.5%.Now operational development.

Yes, as said, we delivered a strong and resilient performance because in '22, we had many challenges, ongoing pandemic, supply chain challenges, raw material and labor shortages. Especially in labor also, in North America, we had a lot of difficult times, especially in the beginning of '22 where we could almost get no labor and ramping up our [Technical Difficulty].

And then, of course, the inflation, which increased during the year, especially during the summertime where we did additional actions immediately after the summertime to take pricing initiatives with our customers, and that took a lot of effort to get it all done. It led to inefficiencies and additional costs and higher work in progress. Also that I think Arno will further explain that, when you look to our drop-through of our organic revenue growth. Now we invested in additional inventory on purpose, because we knew we have to protect and increase our market shares in these times to secure customer deliveries, deliver the strong order book.

Because we, also in the start of '23, we have a very good order book, 37% up [Technical Difficulty] as you know, last year it was already up. So I think we made a good start of this year with the strong order book. And we have to facilitate many, many good business development, organic revenue [Technical Difficulty]. So, yes, when you want to do that, you need also inventory towards the future. But as explained, we have to bring that down, especially looking to the days inventory outstanding. Now, our Aalberts people did a great job. I think we find solutions every time to continue the service to our customers.

Every time you have to find solutions, because you have to go to other suppliers, second suppliers. And the point is that because you can sometimes not completely finish your product or system, yes, that you still make the cost, but you can't deliver it to the customer. So, yes, our backlog was increasing. And we see now that we are decreasing that backlog, so -- and that's also the time to also decrease our inventories. But it needed a tremendous effort of all these people to get these results. And besides that, our people had to drive the long-term business plans and make a great performance by achieving this result we made, as I just explained in the highlights. Now we trained, what I already said, more than 550 talents in the group.

That's through all the segments. We made a people and culture network in our group, and we do that more and more jointly. We train them all. We have -- and fantastic is that 21% of these talented people which were trained, we also promoted in other positions. And that is the real strength we have, because the best people, that is where you make a difference.

So our Aalberts people delivered a strong and resilient performance despite many challenges. Capital expenditure, explained, 38% up. It was allocated to -- and actually, it's in all our business team segments, long-term organic revenue growth plans, which we have in every end market and every business team that makes it also very nice and spread out. A lot of energy in the Company by doing that. Our capacity increase with fast-growing product lines and technologies, we put a lot of money in because, yes, that's innovation driven.

Many examples here. In our press fitting range, we have a new line introduced in North America. I think we spent a lot of money on the new machinery in hydronic flow control, in advanced mechatronics, of course, because we had a tremendous ramp up also in '22, and we expect also a ramp-up further in '23, '24. So yes, we need to invest to support this, facilitate this growth. Operational excellence, very important to continue manufacturing efficiency and reducing costs. And of course, the reshoring trend, yes, we're seeing more and more requests for that. We anticipate on that to put capacity in place. We have some very nice projects, especially also in service technologies where you see that in our sustainable transportation where in e-mobility where you see customers take business back to Europe and they ask us to make plans for that.

That's a real trend, which will increase more and more. That's what we see. We flagged it already early, but it's a real strength of Aalberts towards the future. Now we further accelerate our program to optimize and structure, and to optimize our structure in many places and also consolidate and close locations further. Because our roadmap towards '26 is that we bring our locations down to the 108 locations which we have presented in December 2001. And we are good on track there.

And also there, my colleague Arno will explain more about the financial part of this. But that also will give a good payback for the coming years. In 2022, we -- it was our first year of execution of our strategy. And of course, we -- yes, we just started, but I think the things going in the right direction to achieve our objectives as presented. When we look to the different end markets, as also explained in our press release, I think in shaping eco-friendly buildings, we made a good start of the year in all regions. And what you saw in the second half of the year that our distributors -- and in the beginning it was Europe and later we saw it also in North America, they reduced inventories. So that's also part of the performance you also see in our eco-friendly buildings activities.

And so we had inventory reductions in the second half of the year, and that was also in quarter 4.And on top of that, yes, we had, of course, our supply chain issues, labor constraints. And that combination, yes, that brings -- that you have to reduce your inventories also yourself, so you produce less. But also in our production, we still had disruptions because you could not, in many cases, not finish the complete product or system because one part or two parts were missing. But then you make the costs, but you can't ship it to your customer. So you have more OpEx, and you have less revenue, yes, and that we call that inefficiency. And on top of that, we had a reduction of inventory. So also our margin suffered there a little bit.

We guided that with our trading update on the 9th of November, 2022. And -- but I think still with 15.0% margin for Building Technology, we do a great job. And we also created organic growth in that area, despite these inventory reductions. Our renovation and new build, and that's, I think, also part of that explanation. Yes, that continued. Especially renovation continued.

A new build, yes, we -- and also, I will explain a little bit more on outlook. We see here and there some postponements, but also, you see recoveries of new builds. So it's a little bit diverse picture. But renovation is accelerating, driven by sustainable heating and cooling system and accelerated by all kind of government supporting programs and legislation, like the green deal, EU taxonomy, the subsidies in many countries to go more to heat pumps -- to use heat pumps. And very important is around the heat pump, you need this nice expansion vessel, which you see also on the picture, but also many other products. So every change of a source of heating and cooling means for us business.

Now we explained [Technical Difficulty] that's only in Europe towards 2030 they expect to install 65 million heat pumps. So you can imagine what this means for renovation. It means more flow heating, it means more products of hydronic flow control piping systems, and more in district energy where we see a tremendous conversion also to sustainable energy systems. We see that really that the change from gas basically to district energy. And our company in Denmark did very well through that in '22, has a tremendous order book already in '23. So these innovations and these trends will not go away. So that's very important to know.

We are very well positioned there. So innovation of new products, but also the trend of sustainable heating and cooling systems is driving our growth. Now on top of that, we made a nice acquisition of UWS in Germany, where we bought a company, which has a fantastic service portfolio for the water treatment in heating and cooling systems. And yes, it's a real add-on for our service and digitalization in this market. So renovation to sustainable energy systems in buildings is accelerating even faster. And it could be that new build -- yes, we see some postponement through inflation, but the renovation part, which is 70% of our business in eco-friendly buildings, and that's very important. Yes, that there we are very well positioned. Increasing semicon efficiency.

Yes, we continued our strong growth -- we had -- we could almost not cope with the growth, I must say in '22. It was very challenging. Yes, actually, you could all say luxury situation. But I think when we talk to our companies, they had a lot of effort to do, because there was a high demand of our customers to serve them, especially in the second half, with the ramp-up and went up. But I think we [Technical Difficulty] performance with all our teams to do the ramp-up. We had a great performance and growth.

But we have to improve our efficiency here and also our flows in our factories because, yes, to further ramp-up, we need to optimize and invest and strengthen the organization, yes, to keep with the growth. And -- but it was a fantastic year from a growth point of view. And also, we did two fantastic acquisitions, in my opinion, really nice add-ons ISEL and KML, which will ramp up further in the coming years. Also having a good margin, a good growth. So this market looks very good, also looking to '23, '24 because we are in the right spot of semicon efficiency increasing. That means there where we -- you increase also the efficiency of the chip.

And there we have the OEMs and customers who are active in that field. Now long-term drivers, everybody knows. We also saw an increase in system refurbishment for a new life and new purpose. That means that systems we put in the market with our OEMs, they come back and we refurbish them and give them a new life. We are aiming to bring that in a separate location, because we see so many businesses that are coming towards us. Also driven by sustainable entrepreneurship, again, yes, that we can boost that business together with our OEMs. But that's, again, the strength of Aalberts.

We look to our footprint, where do we have people and space to drive this new business. Now, examples of reshoring of microchip manufacturers who were expanding their regional capacity is further accelerating. You can read it in the news. But we also see that the factories are built more in Europe, North America. So we will take our advantage of that. And do not forget that Aalberts is a key enabler to realize the capacity growth of the OEMs.

That means the customer of ASML, ASMI and Applied Materials, LAM Research, that we are one of the big enablers to also realize their growth. So we will further develop that. Also with co-developments, we have many NPIs in progress, but we have to strengthen our process, our capacity expansion, but also the organizations in all our locations we are doing that at the moment. So we are building -- we are also expanding the buildings. We have a new greenfield project in the Netherlands, which we are -- where we bought land, which we're going to build. And of course, the acquisitions which strengthen the portfolio.

So continued strong growth with a record order book and strengthened portfolio. Driving sustainable transportation, yes, very good performance despite disruptions in the supply chain of our customers. So also in countries like Germany, France -- and yes, we made a very well performance also in quarter four, quarter three, very good, and that's driven by the big demand of passenger cars, motorbikes, especially also motorbikes and commercial vehicles. They're continuing to need our parts, but also our specialized service technologies where we have more and more focusing on specialization. And you see many new developments in e-mobility. When we look, for example, to the companies who make precision manufactured parts, we see 70% to 80% of the new projects we get in automotives are linked to e-mobility. So we are ahead of the game there.

And what is the driver of that [Technical Difficulty] is because electrical vehicles with the battery are much heavier, then they need connectors, because everything is more with current and you need that in combination with metal strip coatings, where we acquired some nice companies. And in many new passenger cars models, and light truck models, they generate additional business anyway because we are in the programs of these new cars. So -- yes, and that's very good news. So you see besides you see that there's a big backlog in this area. So production after the supply chain issues get solved now step by step. Production is increasing. We saw that in -- especially quarter four, and we see that also ongoing in the coming six months that, that is ramping up.

So we have good volumes. Now also, we could keep our margins. We do that through surcharges. And yes, you see again the tremendous strong market position we have in this business. Aerospace and marine, which are behind, performed now very well. Order book further increased also here, driven by sustainable solutions for lightweight materials and reduction of the carbon footprint.

Many new trends here. Also in Marine, we made a fantastic year with many new developments, but also with innovations where our management was very creative to bring that to the market. That continued operational excellence, consolidating our footprint is very important to keep our margin also going up. But a good year, good performance in this area despite many disruptions. Industrial niches, yes, you saw also a strong growth and performance here, despite supply chain disruptions. Markets recovered faster in industrial. Industrial machine builds is a very important part of that.

Order book increased strongly. We invested in many new business development projects and further optimized the technology portfolio. And already explained, we received several requests for customer reshoring projects, and yes, which we'll continue in our opinion. And we put a lot of attention to expand our activities in Eastern Europe where we expanded our locations. The trend of more producing there also linked to reshoring is really visible. And yes, our order book in this area was fantastic.

You see a nice picture here of a precision extrusion plant in the Netherlands. We have a fantastic order book in our company there. And also here, we had to -- we put a lot of, yes, additional capital expenditure in to cope with the growth. Industrial valves business in North America realized a strong growth and we launched end of the year a new patented system for connections and valves for the industrial market. We developed this innovation together with Europe and North America. Production is in three places in Aalberts, and we expect a lot of this system. We launched it on this year in February, and we already get a lot of, yes, let's say, good feedback on this system, which is patented.

So it's a stainless steel system and yes, also that we did. So innovation, I can't explain it enough is really driving our growth also for the coming years. So strong growth and performance and our order book increased strongly. Now these I already explained, innovation. It's our KPI. We went from 15% to 17%.

Our goal is more than 20%. So we have still four years to realize that. And our innovation expenditure is more than 5% of our revenue. So that means when we have a revenue of €3.3 billion -- €3.230 billion, we spent more than €150 million on innovation [Technical Difficulty] which -- was it almost -- it was a little bit more than 10% of that. So we are driving the business from our strong market positions. SDG impact, our goal is more than 70%.

We reached in 2022, 68%. But it is also nice to explain and we will explain that also in our webcast on this specific topic that we already see, based on our strategy, that we will hit -- when we pursue our strategy further as we defined it. And this is really integrated in our business, as you see. So that is [Technical Difficulty] my opinion, so it's not greenwashing. We really do it.

And yes, that's also reengineering mission-critical technologies, enabling a clean, smart and responsible future. So now looking to our net-zero carbon roadmap. Also here, we had set ourselves a target in December '21, which is now 14 -- 15 months ago. Our target was less than -- reduced 30% of our Scope 1 and 2 energy use versus 2018. We realized already in '22, 29%. So almost we reached our target. So in Scope 3, we are now measuring.

We are -- in 2023, we will probably go also to target setting. So we are on track with our promise we made to be net-zero by 2050 or earlier. But that's where we stand. Very important. Also, we put a lot of effort in to get this done. Acquisitions, ISEL, UWS, KML.

ISEL, fantastic add-on in wafer handling and robotics with machine -- and also machine system with digital services. We acquired it with an annual revenue of €35 million. We can tell you it's already higher in '22 and much higher in '23. So a very good acquisition. We integrated it with our company, IDE in Germany and it's part of advanced mechatronics, a very nice add-on. UWS, hydronic flow control eco-friendly buildings, water treatment of the heating and cooling system, so all kind of services we do on-site, but also we build products and systems for that with digital services.

Very nice company. And we also can scale up our service activities of total hydronic flow control. that was also the idea behind it with an annual revenue of approximately €25 million. And KML, we acquired in the second half of the year. A fantastic company. Mechatronics solutions, especially linear motion, which we didn't have as a technology, so sophisticated in our group.

We also got a fantastic key account in the semicon world, where we can do also other technologies with. And the annual revenue was €35 million. But also here, we will ramp up quickly to a much higher level. And also, this company is realigned already nicely with the existing management and the existing owner. So yes, very nice add-ons in my opinion. And we have divested ETI at the beginning of the year and VTI at the end of the year, because both companies, in our opinion, were non-core or we could not grow it to the level which we wanted. And so we further optimized our portfolio. Then I would like to give the word to my colleague, Arno.

[Arno Monincx, Chief Financial Officer]

Yes. Thanks, Wim for the presentation, and welcome, everybody else from my side. And I will give you -- I will lead you through the financial development of 2022. Starting with the revenue bridge, where we came from the €2.979 billion revenue of 2021, we added acquisitions of '21 and '22 with a revenue of €126.3 million. Then we had the disposals, divestments also in 2021 and '22 with a negative impact -- quite a big negative impact of €208.1 million.

Then impact of €86 million, mainly the effect from dollars -- U.S. dollars. And that, yes, results at the end in an organic revenue growth of €246.6 million. And when you add it all up, you come to the €3.230 billion revenue of 2022.Now we do the same, as always, for the EBITA bridge. We started with the €454.2 million last year '21, where we added the profit of acquisitions we made in '21 and '22 of €28.5 million we deducted the lost EBITA we had from the divestments of €23.9 million.

And again, you see here quite clearly also the portfolio improvement that we constantly make with our M&A strategy and the acquisitions have in general a much better profitability than the disposals. The currency, EBITA impact of €10 million, also mainly the effect of U.S. dollars. And that results then in organic EBITA growth of €31.5 million. And that -- when you add it all up, you'll finish at €500.3 million of EBITA in '22. And also here, you see, of course, a lower drop through of our organic growth, yes, that had to do with the higher cost we had to make due to the supply chain issues, due to the labor shortages to get all the revenue out of our companies.

That cost -- we had to make more cost to make that happen. That is also what we already explained in November. Then the consolidated income statement, where you see, again, the revenue of €3.2 billion versus the €2.9 billion last year. We see, of course, a slightly higher depreciation as an effect from -- yes, from also the higher CapEx spend that we did over the last two years, EBITA improvement. And then you see also that the net finance cost increase.

Yes, the interest expenses have gone up, but also we consumed more cash, I will come back to that later, during the year with the higher working capital that we needed to finance for the decisions we made to accept a high inventory level to serve the customers in the right way and to protect our market position and even improve our market positions. The higher income tax expense, in line with profits. And then we have a net profit before amortization of €372 million, which leads to an EPS before amortization of €3.37 per share versus the €3.05 of last year, an increase of 10%.

We made a strong performance, 9% organic revenue growth and an EBITA margin of 15.5%.On the balance sheet. Also there, you see the higher, let's say, capital assets, of course, from acquisitions but also from higher inventory levels, higher working capital that we still finance with a very solid equity position that slightly decreased, but still at a very good level of 56.1%.

And then you see also that we -- that the net debt finished higher from €492 million last year, but of course, also the net debt was positively impacted by the divestments -- the big divestment we made with Lasco. And now we have finished with the net debt with €794 million at the end of this year at a leverage ratio of 1.3 versus 0.9 last year. It's still quite below our objective. But as Wim said, we will also work in 2023 to bring inventories back in line, again, DIO wise where it should be. So that will then also go in a better direction. The net working capital, higher €721 million versus €452 million last year.

And the days -- yes, for the same reason, higher at 80 days versus 58 days last year. Our solvability already touched. And the return on capital is a result of these elements, of course, 1.1% lower than last year. And also there, we expect that to bring it back in the right direction when we also bring back the inventories in the right direction. Increased [Technical Difficulty] it was for a good reason to invest in our additional inventories to serve the customers and to -- and that is also, we believe, the reason why we could make two years [Technical Difficulty] healthy organic revenue growth in this, yes, let's say, a challenging environment. Now the free cash flow. From the EBITDA, €633 million in '22 versus €585 million before exceptionals in '21.

There you see the gain of disposals we made in 2022 of €34.4 million. This gain, of course, is part of our EBITA. It is reported in our holdings/elimination line, as we do that always. But at the same time, we also made operational excellence costs of €25.1 million, which is also reported in the same holdings/elimination line. So both of these elements are in our, let's say, reported numbers. And besides the operational excellence costs of €25.1 million, we also have our normal, let's say, one-offs, extraordinaries and some other expense.

So at the end, the advantage of this gain on disposals is only approximately €4 million versus last year. That is what you also see in the press release in the holdings/elimination reporting of €2.9 million negative versus €7.3 million negative last year. Then you see the biggest impact for our free cash flow, the change in working capital, which is, of course, the main reason the higher inventory levels, but it's €135 million impact year-on-year for the, let's say, the cash flow from ops, let's say, performance. And then the higher purchase of property, plant and equipment of €44 million versus last year. The cash out results at the end in a free cash flow of €168 million versus €310 million last year and €142 million lower. Main impact, changes in working capital. The segment reporting of both building and industrial, where you see that building -- of course, you see the impact of our disposals also there.

Lasco was -- and Standard Hidraulica both were part of building, so that had impact. So it's minus 1% revenue on the top line. But organically we made a nice growth in these challenging times still of 6.1% growth, last year 15.9%. The EBITA, €276.4 million, it's slightly lower than last year, 5% lower. And the EBITA performance as the percentage is 15.0% versus 15.6% last year. And there, you see, yes, where the -- let's say, the extra costs, the extra investments in work in progress to missing components, supply chain issues, labor shortages that all had to do with this performance because, therefore, you cannot operate in the way as it normally should go.

So that is where you see the lower profit performance. Capital expenditure increased from €75.8 million last year to €94.3 million for all these good business development and organic growth plans as Wim already explained quite clearly, 24% up. In the Industrial Technologies segment, where we see an increase of 24% in the top line, which is actually 12.6% organic growth over 2022 versus 16.1% last year. So that's a 3.5% lower. The EBITA is €226.8 million, and that is 16.3%, which is higher than the 15.2% last year. It's a 1.1% improvement. Good performance we made in industrial technology.

And the CapEx spend also increased from €68 million last year to €108.3 million this year, 59% up. The revenues per end market, where you see eco-friendly building with 54%; semicon efficiency with 12%, really increasing rapidly as we also have already explained quite a lot over the last years. That we expected that to take -- to become a bigger piece of the pie, and that is now happening with the strong growth that semicon efficiency is making over the last years. Sustainable transportation at 15%, and industrial niches at 19% of the total revenue. Then the revenue per region, where we see Western Europe, 59%; America, 24%; Eastern Europe, 12%; and APAC, Middle East Africa, 5%.The dividend. Like Wim said, we proposed to the General Meeting a cash dividend of €1.11 per share, which is 10% up versus last year, where we had €1.01 as normal regular dividend. And of course, last year we also made a special dividend of €0.64 that had to do with the exceptional benefit of €100 million that we did last year. But the €1.01 is the regular dividend of last year and compared to that dividend, we increased it again with 10%, which results in a CAGR of more than 12% over the last 10 years when you look to our dividend development from €0.35 in 2012 to €1.11 in '22.Our track record picture every year.

Of course, we adapt that for the last year. And here, you see the steps every five years, what the performance has been. It's a proven, sustainable business model where we also see now that we went for the first time through the €3 billion of revenues. But also for the first time through the €500 million of EBITA performance, which ends up then to this picture with a nice sustainable profitable growth development over the last 45 years. And this is how we believe that the value creation of Aalberts is really presented. Earnings per share, let's say, also over the last 10 years, you see a CAGR of over 9%, while the dividend over the last 10 years has a CAGR over 12%.

So also there, you see that in the course of the years, we also paid a little bit more dividend than the earnings per share development went up. So let's say, the earnings per share, €3.37. The dividend per share now at €1.11.And the return on incremental capital employed for us, a very important KPI [Technical Difficulty] how you are able to make the returns on all the capital that has been allocated, including acquisitions, including the goodwill, very important to understand.

And when you compare the last 10 years, 2012 to 2022, we added €280 million of EBITA and at the same time, we added capital employed for €1.5 billion, which is 18.7%. That number is lower than we presented last year from 2011 to 2021, it was 23.5%. But we also expect this number to go up again when we have normalized our inventory levels again. Now the supply chain issues become better, so that number -- and we believe this is really showing the trend, yes, how the return on capital employed will be.

Of course, when you take it over the last 10 years, you see that it is having a trend towards already over 18% at this moment. In the long-term shareholders, we have more than 3% holdings that is approximately 50%. The result is of our value creation.

[Wim Pelsma, Chief Executive Officer]

Yes, then the outlook for looking forward. I think it's very important to start with is that we have a strong order book. Our order book increased by 37%. So that means a good start of the year. And also looking to the already strong order book, we increased -- we saw increasing in '21 on top of that. The second thing, I think, I would like to mention on this topic, strong order book is that, yes, we keep on investing.

So our CapEx was €203 million in 2022 that will go up further. And yes, it could be in the range, we also -- which we -- on the top of the range, which we also guided on December '21, so close to the €250 million. Now we would, of course, not keep on investing when we would not have a positive feeling about the future because, again, the main driver of the business is our innovations. So the long-term growth plan, so we will pursue them further. And that needs capital investment and also that we have to create and develop [Technical Difficulty] our biggest issue, in my opinion, is that we need the best people to also drive the growth. So -- and then, of course, we will relentlessly execute our strategy. We are one year, we have now finished in 2022, so we go in the second year.

And yes, we are still on track to achieve our objectives in our opinion. And as also explained, we will try to reach them as soon as possible, but at least the end of '26.Now looking to the end markets and giving a little bit more flavor there. I think semicon that will continue. We have a great record order book. We are almost not able to, let's say, cope with the demand.

But we are increasing our capacity, and we will see there a good '23, what we see at the moment. But also, again, good growth, strong growth and performance. In our building -- shipping eco-friendly building activities, yes, sustainability is really driving their and accelerating the renovation business. It could be that new build here and there get some slowdown through inflation, but it's 30% of our business. And we saw it already also last year that people were a little bit hesitating because of the inflation. But on the other hand, there is a tremendous demand for buildings. So we also see that after some adjustment of the consumer to the higher price, in the end, they need a demand for a building.

So I think we are very well positioned also combined with our innovations. And again, 70% of our business is their renovation driven by the sustainability trend towards sustainable systems for heating and cooling. And do not forget also the fact that there are many legislation subsidies in place to drive this business. Sustainable transportation, yes, we see many new developments on e-mobility. We have good volumes also, let's say, coming after -- out of the, let's say, in the new year. A good order book.

The visibility here, of course, is a little bit shorter. But I think for the coming months, it doesn't look so bad. And let's see how that progresses. We are able to put also our prices towards the customers, through our surcharge system. That's again a very best practice of the group. So we share that in the whole industrial company in all our industrial companies, how we do that.

And yes, now the -- let's say, the energy price is going down that at least it gets also lesser pressure on this topic. And yes, we see there -- yes, at least we see there a good start of the year. Industrial, enhancing industrial niches, good order book. At the moment, we do not see postponements of our order book. I think the second half is a little bit less visible. So I'm also there a little bit cautious in that area.

I think the coming months, yes, it will be good. But let's see how that plays out. When inflation keeps on going, of course, that will not have -- they can have a more disruptive effect in the end. But let's say, we made a good start also with the order book. Crucial for us is operational excellence has to continue, that's also why I think we did again, we accelerated again, and that should actually be common practice. Every year, we have to drive operational excellence.

The €25 million we invested in operational excellence will have a payback of two years, so it will also have a €12.5 million effect on '23 million and €12.5 million effect on '24, so that also helps. And pricing excellence, protecting, increasing our margin is part of our culture. So even when raw materials here and there go down, we still protect our margins and -- but it's a very volatile world. So we are also cautious. We are at the beginning of the year, but let's say we are not so negative. But it's the beginning of the year.

And yes, we drive our strategy. And that's, I think, a more -- little bit more flavor on the outlook. So I think there will be -- I hope there will be a lot of questions which we can answer.

[Operator]

[Operator Instructions] We will now move on to our first participant, David Kerstens from Jefferies.

[David Kerstens, Jefferies]

I've got three. First of all, maybe can you explain what drove the accelerated organic growth to around 8.5% in the final months of the year? And was that mainly that the destocking trend that you referred to in eco-friendly buildings. Have you seen the worst of that? Is that behind that acceleration?

Or is it more in the semicon efficiency business where you had, by far, the strongest growth if you look at the end markets. The second question is on the innovation rate, 17% of revenues. Can you confirm you are already spending at least 5% of your revenue on R&D? Or is that the target for 2026? And how much did you actually spend in 2022? And a question on the request for customer reshoring projects.

[Wim Pelsma, Chief Executive Officer]

Yes. Shall we first answer these first two questions, David?

[David Kerstens, Jefferies]

Yes. please.

[Wim Pelsma, Chief Executive Officer]

So the first question was about the organic growth. I think, yes, you are right. I think in quarter three, that was really a reduction of inventory in eco-friendly buildings. It started already in -- a little bit in July, but especially, I think after the summer, we saw a very slow ramp-up after that. And it was not only in eco-friendly buildings.

It was actually also in some other parts. So I think there was a sort of reset after the shock of the inflation increase that a lot of companies, yes, let's say, also looked to their inventories. Now, in eco-friendly buildings, it was in the beginning, firstly, Europe, that's also what we guided. But we saw also later in the year that it was also in North America, especially towards the end of the year. Yes, and I think the increase in quarter four is mainly explained by also the -- I think, the ramp-up of the industrial part of the Company because there, you saw that after the summer it was a little bit slower, but then it increased, especially in the last part of the year where eco-friendly buildings were still suffering also from inventory reduction, but the orders were again increasing. So yes, your question is, is there a big part of the inventory reduction, is that done in eco-friendly buildings? I think I think the answer is yes, but we are not done yet. So I think there's still optimization.

But through the softening of the supply chain issues, you see that, yes, that people optimize -- that customer is optimizing their inventories everywhere. But we will also do ourselves. So that yes, that's probably the explanation for the quarter four organic growth. Now innovation rate, yes, innovation rate, 17%. I think it's a real achievement. We went from 15% to 17%.

That will go up further in '23, I'm convinced, because we have so many projects running in the pipeline, which are just starting. So innovations are in the market, but they are ramping up. And again, innovation takes a long time. It can take four, five years in our business sometimes before you really see some results. And -- but the start was seven, eight years ago, and you see there really, yes, effect from that. The expenditure, I think we will be close to the 5%.

We didn't disclose that number. So we're also not going to do that. But I think we were very close with the 5% and that will further increase, because the portfolio is changing also through acquisitions. That is helping that innovation rate. Companies like UWS, KML, ISEL, they are all very innovative, a lot of engineers. And the second thing is that, yes, our business development roadmaps are further pursuing towards the future.

So that's -- so that will further pursue. So the answer is, yes, let's say, close to the 5% and the 17% will go up further in '23 to hit our goal as soon as possible, more than 20%. Your third question?

[David Kerstens, Jefferies]

Yes, a question on the working capital. How much are you targeting inventory to come down this year? What is the best way to look at that and how much cash will be released as a result?

[Arno Monincx, Chief Financial Officer]

Let's say -- we will bring it, let's say, mainly inventories there. We will bring further line because actually, our DSO and DPO are okay. They are the [Technical Difficulty] inventories. And like Wim said and also I said, we will bring it further in line in the course of the year. We will do that gradually in line with what we can do. So, fortunately, we -- that's also what we explained in the press release.

Let's say, of the total increase of €223 million of inventories, it's about €125 million related to volume and the remainder is inflation and acquisition divestment, let's say, results or FX. So it's €125 million is the real volume, and let's say, we will bring that further in line. And we believe we can do so, because also still a big part is in work in progress and in raw materials. And because normally, when raw materials are less available or there's less -- more insecurity about availability, normally, the companies take more on stock to be sure to have it on stock to be able to produce. That is, by the way, the reason that in these critical times, we could continue to produce and to continue to deliver our customers. But also, yes, the raw material, especially, you can really manage, of course, down when the availability improves again. So that is what we will do.

But it's not -- we will not make a rapid change, but we will like a gradual improvement in the course of the year.

[David Kerstens, Jefferies]

Sounds good. And maybe a final question for Wim. You announced your retirement, congratulations. Maybe a bit sooner than we had expected. I was wondering if you could comment on the progress for -- in terms of a search for a successor, please?

[Wim Pelsma, Chief Executive Officer]

Yes. As we also stated in the press release, we are busy with the process, and I think that's on track. So, yes, let's see how that works out in the coming months. We are talking to candidates. So -- and further, I can't say so much anymore until -- when we have clarity on that, we will come as soon as possible with the press release.

[Operator]

We will now move on to our next participant, Martijn den Drijver from ABN AMRO ODDO.

[Martijn den Drijver, ABN AMRO ODDO]

On the organic growth per reporting line, could you roughly split that 6.1% and 12.6% in price and volume, roughly?

[Arno Monincx, Chief Financial Officer]

Let's say, when we see the total organic growth, Martijn, of 8.7%, we -- let's say, the pricing and volume effect is about 50-50. That's not so much a change versus the last communication in November, of course.

[Martijn den Drijver, ABN AMRO ODDO]

And is there a material difference between the two reporting lines?

[Arno Monincx, Chief Financial Officer]

I think, let's say, the -- let's say, the pricing impact is a little bit higher in building than in industrial.

[Martijn den Drijver, ABN AMRO ODDO]

Got it. Then moving on to my second question. The supply chain disruptions and the inefficiency in production in Building Technology in 2022. If you take the 15.0% relative to last year, which was 15.5%, would it then be fair to assume that if supply chains normalize, you could get back to that 15.5% again in 2023, also taking into account the effect of divestments? Or would that be too positive?

[Arno Monincx, Chief Financial Officer]

No, I think when that would normalize again, that should be possible again, yes.

[Martijn den Drijver, ABN AMRO ODDO]

Okay. And then on industrial, you had very good organic growth, yet your EBITA margin was slightly underwhelming. And I heard Wim say something about the efficiency of semicon, how that has to improve and that the organization needs to -- and these are my word -- step up. Would -- is that the right interpretation that, in fact, surface technologies and industrial niches did reasonably well, but that semicon because of that high growth wasn't generating the efficiency that we might have expected?

[Arno Monincx, Chief Financial Officer]

Yes. First of all, I think 16.3% margin is a very good -- we were very happy with that. So that's the first thing. And on top of that, you grew 12.6% organic. But also here, we had the supply chain issue.

It's not only in eco-friendly buildings. Also, we had supply chain issues. So also in advanced mechatronics, we had -- yes, we had especially electronic parts, which we didn't get. So that means you build a system, a complete system, which you want to test and deliver and you can't ship it, and then you have to find second suppliers, which are not there, third suppliers. And then you have to talk to the customer because the third and second supply has to be approved. So it's so many disruptions we had also there.

So that absolutely affected our efficiency. So the answer is yes. But still, we made, yes, 16.3%. I think we did a very good job. In also other parts of industrial technology, that -- also there, we suffered because of material shortages like in companies like also in MIFA, yes, we also had in the beginning of the year difficulties and over the second half. But I think it's -- so it could have been better. We could have shipped more.

I think that is not said so much. But because our backlog is [Technical Difficulty] we are now reducing that. And -- but still, I think, 16.3% is a very good performance. But --

[Martijn den Drijver, ABN AMRO ODDO]

Okay. Then I'm going to try again on the inventory and the net working capital, Arno, if you don't mind.

[Arno Monincx, Chief Financial Officer]

Try it..

[Martijn den Drijver, ABN AMRO ODDO]

Net working capital -- here is my question. The net working capital as a percentage of sales was slightly over 22% in 2023. Normally, net working capital is 15%, 16%, 17%. Would that be the target that you're aiming for in 2023 if markets of the supply chains normalize as you now see? Or will you be still slightly more cautious in order to -- for you to still continue to service your customers?

[Arno Monincx, Chief Financial Officer]

Look outside what is all happening around the world, and you'll understand -- I'm sure you understand how insecure still everything is. It looks like it's improving a bit. So it's more stabilizing. We are quite sure that we can improve in the course of this year, '23. How far we get there is really depending of the situation outside. But let's say, assume that in the coming two years -- two-three years, we will go back to normal again.

And when it goes -- when we can do faster, we will do faster. That is just how we -- and let's say, we made -- we are absolutely convinced we made the right decision, because of the performance that we could realize, despite all these effects, that's also why we could make this organic growth developments. And also because we know that we can finance it. And so we really leverage the balance sheet in the right way. In these times, yes, we should accept and finance higher inventory levels and to be able to deliver to the customers. Now of course, also, we like good returns on capital employed. So we have a good focus on that number also, and we will bring it back in line again as soon as we can do that.

And again, I really believe we should improve this year, and let's see how far we can get there. But especially in the coming years, it will go back to normal again.

[Martijn den Drijver, ABN AMRO ODDO]

Fair enough. And then my final question is on the operational excellence. You mentioned €25 million in the holding one-off line. My understanding is that usually, when you do -- when you go through such an exercise, there's also a savings target attached to that restructuring element. Can you please share with your thoughts about the savings for 2023, 2024?

[Arno Monincx, Chief Financial Officer]

Yes. That is, let's say, the payback is two years. So it's about €12.5 million per year. That's how we earn back this €25.1 million restructuring projects. And again, we have besides the restructuring projects, we have also other one-off costs as always.

We -- these operational actions projects are really investments in recurring annual benefits. And that's also the situation with this program. So it's about €12.5 million recurring annual benefit. So in two years' time, you have to pay back.

[Martijn den Drijver, ABN AMRO ODDO]

Okay. And then sneaking in one final one. You divested VTI. Wim already mentioned didn't fit the profile that you were looking for. Is that on the growth or on the EBITA margin?

So in other words, was this materially below the average? Or how should we think about that?

[Arno Monincx, Chief Financial Officer]

Actually, VTI is a profitable company. And the reason that we divested it, it's a good company also. But the reason that we divest it is that the growth potential is limited. It's not in line with the ambition that we have for our total portfolio. So then when you allocate your capital every year to such a company, the return is always less than in the fast-growing product line.

So that's the real main reason to divest it. And as we have explained earlier, it's not always in profitability, which is the reason to divest the Company. Actually, VTI has a very good profitability. But it's a small company. And when you look over the performance and the development of the growth over the last, let's say, 10 years or so, now we don't see the progress that we should see. And there's not enough, yes, let's say, synergy with the rest of our portfolio to really also help them to a higher level, then we should really make it a special focus and maybe another activity around that, but that's not what we want to do, of course.

So it's really for the reason that we saw two less growth.

[Operator]

We'll now move on to our next participant Henk Veerman from Kempen.

[Henk Veerman, Kempen]

On Building Technology, the implied organic growth rate in the second half is about 2%. And I'm assuming that implies a slight decline in volumes in the second half of the year. And can you give a bit more color on that volume decline in the second half in Building Technologies because you are quite bullish on renovation. So I'm assuming that the new build segment had a 30% of that segment that saw quite a steep decline in the second half of the year. Is that correct?

[Arno Monincx, Chief Financial Officer]

Could you repeat because I couldn't hear you. You fell away for some time. So...

[Henk Veerman, Kempen]

Oh, okay. Apologies. So in the Building Technologies segment, in the second half of the year, you report an organic sales growth of about 2%. And given that your selling prices have moved up a lot, I'm assuming that, that organic sales growth implies an organic volume decline. And given that you -- in the call, you were quite bullish on the renovation part of the Building Technologies segment.

So I'm assuming that this volume decline, is that fully explained by the weakness in the new build segment of the business?

[Wim Pelsma, Chief Executive Officer]

No, no. I think you're right. I think we had a very small decline in volume. It was, let's say, zero or minus something like that in the second half. Main reason was inventory reduction.

So I think we had -- in quarter three, we had a tremendous inventory reduction and that continued on a lesser scale in quarter four. So that was the main reason. And -- but the new build was not really visible because that's not how quick it goes because projects are financed so they will be built. But we saw some effect of it, but that was not the main reason. I think the new builds that's okay. But the new build, you have a strange situation.

Therefore, I think we just have to be cautious but also not negative. Okay. There's a tremendous demand also in Eastern Europe, for example, for buildings in the Netherlands, in France and everywhere. So the moment the prices go up for new build, then you see that people -- yes, consumers get a shock about it, and they wait a little bit. But when inflation goes down and people get salaries, they have to step in because in the end, they need a space to live. So it could be that you get some postponements here and there, we see that.

But if that has a big effect, then let's just see, but let's be cautious. But renovation is accelerating, and that's 70% of our business, combined with our innovation. So therefore, I'm -- yes, you could say bullish, I don't know what it means, but I'm not negative and positive, let's say, about the renovation market in combination with our innovations. So you could have some pressure on the new build in the course of '23 and maybe '24, but that is a little bit the situation.

[Henk Veerman, Kempen]

Okay. That's clear. Second question is on the one-offs in your results. That may be a question for Arno. But do I understand correctly that the full benefit of the disposals being about €34 million last year.

Is that fully included in EBITDA? Is that correct?

[Arno Monincx, Chief Financial Officer]

That is correct. The full benefit is included, but also the disposal costs and the restructuring projects and the one-off costs, normal one-off costs, which we have every year a few million are included in this number, which at the end results in this negative holding elimination result of €2.9 million negative in '22 versus €7.3 million in '21. So that is the real difference, I would say, of this special effects.

[Henk Veerman, Kempen]

That's clear. And then on the inventories. And yes, I'm coming back to that topic. I'm aware of the previous questions that's been asked on that. But I remember in 2019, specifically on inventories, you guided for a reduction of €100 million -- up to €150 million at the time, which implied sort of inventories as a percentage of sales being 17% to 18.5%.

And today, or at least at period -- last year, we stood at about 28% of sales. And you already commented on, let's say, the normalization of working capital in the next two to three years. But do you think over the medium to long-term, this inventory position being less than 20% of sales, is that still a realistic target?

[Wim Pelsma, Chief Executive Officer]

Yes, I think so, Henk. Let's say -- and we did not stop with the inventory improvement plan. We started that off at the end of '19, and the ambition was that we -- in calculating days that we would improve about €150 million. And we have the ambition to do that with reducing the slow moving, giving it more attention, having regular meetings with the teams to solve that, to improve them. But also, of course, the improvement of the distribution footprint and with less locations do more and efficiency, both in North America and in Europe. Now we continued with all these investments.

We continued with the attention for these, let's say, slower moving parts. And as I also, let's say, explained earlier, I think, to Martijn, is that yes, a big part of this higher inventory level at this moment is in the work in progress and in the raw material. So that means it's not even a finished good. It's -- so it's quite fresh stock. So it's more, let's say, really the decision that we made to [Technical Difficulty] of the stocks or it is because we could not finish the application because of a missing component or missing -- also a missing chip in our applications for hydronic flow control, for instance, or for advanced mechatronics. These are the reasons that these numbers are higher.

And yes, let's say, we expect it to improve also this year so that we can bring it back to more normal levels. How quickly it goes. That is a little bit depending of the outside world, but we will do what we can, of course, to bring it back in line again. But I'm absolutely not worried that we are not able to do so for these reasons, it's fresh stock, it's raw material. And these are just the issues that you can change again. And that is also, of course, how we act and deal with our teams.

And we continued with the improvement yes, of the, let's say, the slower moving part of our inventory. So that is actually quite well under control.

[Henk Veerman, Kempen]

Last question is on the backlog, which was stood at 37% higher year-on-year, quite a significant growth. Can you remind us as to how much of that backlog now -- like is -- how much does that constitute as a percentage of the total business? Because I think it's -- the backlog is mainly measured in the industrials business. Is it above?

[Wim Pelsma, Chief Executive Officer]

Further -- your first question is that we can't do that, because we didn't disclose that. No, it's -- the backlog is in every business. So -- but as you know, there is, of course, a different dynamic in the backlog. What you also see is that by changing our portfolio, you get also another backlog situation. Okay, I sometimes hear, yes, the backlog says nothing with Aalberts, because its -- but that's not true because the whole portfolio changed the last 8 or 10 years tremendously.

So the backlog is saying a lot. That's also because it's complete other company than 10 years ago. So the backlog is in industrial, but it's also in Building Technologies. And it's, of course, also in the industrial part -- industrial niches, but also sustainable transportation were we have a low backlog because that's the character of the business. That's, of course, in service technology because it's a service business. So you look only maybe one or two weeks, three weeks ahead.

But yes, so that would be my explanation. But it says also something yes, about the change of the portfolio we made in the last 10 years.

[Operator]

We'll move on to our next participant, Marta Bruska from Berenberg.

[Marta Bruska, Berenberg]

Congrats on the excellent results. Most of my questions were actually -- most of my questions were actually already answered, but I have just last clarifying questions. So with regards to this 37% order book up is that -- that this relates to the order book, not to the new incoming orders, right?

[Arno Monincx, Chief Financial Officer]

That's correct. Order book, yes. The book per year-end.

[Marta Bruska, Berenberg]

All right. And then some of your peers in Building Technology commented on a very strong order intake in December. So I know you already mentioned how the end markets develop all in your outlook. But can you comment specifically on that, whether for you as well the order intake in December for eco-friendly buildings had developed --

[Wim Pelsma, Chief Executive Officer]

Yes, you're correct. And that -- the order intake was also -- was not bad in December. So it says something about the inventory reductions as customers made in the second half of the year. So they were very heavily reduced in quarter three, but it continued quarter four, but then the orders again back for the next year in December. But -- so let's see how that plays out.

But that's correct. A good research.

[Marta Bruska, Berenberg]

All right. It seems like there are two effects, right, there is an underlying demand for renovations as you mentioned, still very, very strong, and then we are destocking, destocking effects at the wholesalers, but mainly on the quarterly basis a little bit cloudy picture. But helpful earlier comments, thank you. So that's basically from my side.

[Operator]

We'll now move on to our next participant, Marianne Bulot from Bank of America.

[Marianne Bulot, Bank of America]

I was wondering, first, if you could comment on what you see in terms of pricing dynamics coming into next year? And more specifically, in the building part, what you see in terms of volume and risk of decline in the new build?

[Wim Pelsma, Chief Executive Officer]

Yes. On Building Technology, let's say, our end market shaping eco-friendly build. I think the pricing dynamics, we increased our prices further at the 1st of January based on -- yes, on the inflation costs. And yes, so hopefully, what we see now is that inflation is stopping. So let's see what happens.

When it's further increasing, we will also further increase our price -- pricing excellence and pricing increase. Pricing power is very important because you have to keep your added-value margin, that's our goal. And yes, so that's my first. And the second is, yes, it's the dynamics of the business. Yes, I think a lot of inventory reduction has been done in 2022, but it's not finished. That's also what your colleague just mentioned, especially in wholesalers they are further optimizing.

But looking to the -- yes, to the end user of our Building Technology products, which is the installer, which is [Technical Difficulty] a project developer, yes, there's still a lot of demand. So that means in the end that's much more important that when the stock reduction is more and more finalized, yes, that you will see the demand. And we started already end of the year in our order intake. So that's a little bit the situation we have. But we have to be on top of the -- our margin, as we always do, and especially also on top of our OpEx because the OpEx is increasing also through inflation. So we have to counter attack that by efficiency and by operational excellence projects, which we again accelerated.

[Marianne Bulot, Bank of America]

Okay. And another question, if I may. On your M&A pipeline, do you still intend to continue to develop the hydronic flow control and semicon? If you could give any color on your pipeline?

[Wim Pelsma, Chief Executive Officer]

Yes. We are always busy with add-ons, and we have a list pipeline as always. And that's mainly in advanced mechatronics, hydronic flow control, but also service technologies. I must say our biggest priority, as we always said, is organic growth. We have a tremendous amount of organic growth initiatives.

Yes, we are very busy to handle that all. That's also explaining our CapEx increase. And that could go towards, yes, the €250 million in 2023.So that needs a lot of operational management handling. But on top of that, we still look to some nice add-ons in -- when we can find them in 2023 when they have the good price and they have the good management, as always. Yes, that situation has actually not changed.

Yes. And we will really focus to improve our free cash flow again during '23 also by improving our inventory and our performance.

[Marianne Bulot, Bank of America]

Okay. And just on the CapEx, is there any specific technology cluster and end markets where you want to more focus than others?

[Wim Pelsma, Chief Executive Officer]

No, no. I think in every area, we are investing at the moment. So -- and yes, also through the -- here and there, we have some additional buildings we have to build. So that gives a little bit a peak, the coming two years, what we also explained because we need, of course, places to expand that's in hydronic flow control, but it's also in advanced mechatronics. And in service technologies and also integrated piping system, we have many innovations in the pipeline, but also fast-growing product lines, fast-growing technologies, which we are pursuing. And the strategy is -- and I think that is really paying off and it will pay off is we will not stop with the investments, even when we have a higher working capital temporary.

And you see also that in other -- in the markets and competitors that they are more cautious, but we keep on investing, and that will pay out. But you see it already in organic growth of 9%. So -- and we have also the financial power to do it.

[Operator]

We will now move on to our questions from webcast. First question is from [Indiscernible]. Looking at the EBITDA bridge, €23.9 million of revenue is lost due to divestments. In the cash flow statement, the line item, disposal of subsidiaries total is €65 million. Could you give some color on the disposal item because a proceed of €65 million for a loss of €23.9 million seems not attractive?

[Arno Monincx, Chief Financial Officer]

I'd say, yes, but you should understand that the disposal is, of course, only for the divestments that we made in 2022. That's in the cash flow statement of 2022. And the loss of EBITA has also partly related to the disposal we made in 2021. So that's for two years. So you cannot compare these numbers or relate these numbers to each other.

[Operator]

All right. Second question from the webcast is from Walter [Indiscernible] from [Alpha Value] .It could be in the press release, but could you give more color on what is behind the other income of €54.8 million?

[Arno Monincx, Chief Financial Officer]

Yes, of course. The €54.8 million other income that is -- part of that is the €34 million of income that we made with these disposals. So that is where we always report that income. You saw last year that, that number was, let's say, €177 million, including the disposal of Lasco that was also in that line at that time. And yes, the remainder is about €20 million, which is actually normal, which we have every year about other income issues, which would book, there like insurance income or, let's say, whatever has to be booked there.

But it's -- every year, it's around €20 million, which is the normal level of other operating income. Governmental grants are also booked there.

[Operator]

The third question is from Sonia Fasolo from ELEVA Capital. Could you give a little bit of details regarding the increase of inventories? How much is price? How much is from work in progress and how much is from the finished goods?

[Arno Monincx, Chief Financial Officer]

Let's say, these are, let's say, three different things. So from price, we guided there. So we have explained the inflation impact in our inventory line, which was €69 million. And let's say, the work in progress and the finished goods, of course, we did not disclose, and we will not disclose that. But I can tell you that the majority of the total income -- sorry, of the total increase of our inventories was in raw materials and in work in progress.

[Operator]

It appears there is no further questions. I will now hand over for any additional or closing remarks. Thank you.

[Wim Pelsma, Chief Executive Officer]

So thank you very much for joining the webcast and all the questions, and we hope we gave some clarity and we wish you a nice day. Thank you.

[Arno Monincx, Chief Financial Officer]

Thank you.

[Operator]

Thank you for joining today's webcast. You may now disconnect.